Lithuania Should Focus on Medium-Term Fiscal Pressures

International Monetary Fund. External Relations Dept.
Published Date:
August 2006
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Lithuania’s GDP grew by 7.5 percent in 2005, with declining unemployment, high capacity utilization, and buoyant asset prices, according to the IMF’s recent economic review. But rising inflation has exceeded the Maastricht inflation reference rate, delaying euro adoption. The economy has continued to be stimulated by fiscal and European Union (EU) expenditures.

The IMF Executive Board welcomed Lithuania’s economic performance, attributing it to strong macroeconomic policies, wide-ranging structural reforms, and EU integration. But, the Directors cautioned, imbalances are emerging. Rapid growth of consumption and of investment in property and construction have contributed to inflation and new financial vulnerabilities. Over the longer term, challenges are likely to arise from international tax competition, demand for public goods, emigration, and pressures on international competitiveness.

Lithuania has a sizable current account deficit but low external indebtedness, and the risks from accumulating external short-term debt will need close monitoring. Rapid credit growth has supported households’ increasing appetite for mortgages and corporate demands in nontradables sectors. The Directors saw no need to slow the pace of credit growth directly, but encouraged the authorities to conduct forward-looking supervision, cool the property market, and encourage the disclosure of bank fees, among other measures.

Real GDP growth10.
Consumer price inflation
(12 months to end-year)–
Unemployment rate (end-year)12.411.38.34.2
(percent of GDP)
Current account balance–6.9–7.7–7.0–7.5
External general government debt13.813.713.212.8
Data: Lithuanian authorities and IMF staff projections.
Data: Lithuanian authorities and IMF staff projections.

On the export side, growth has been sound but faces capacity constraints in the oil-refining industry and increased international competition in labor-intensive goods.

According to the Directors, a year’s delay in Lithuania’s adoption of the euro is unlikely to concern financial markets: the currency board, fiscal policy, and trade and financial integration with Europe can be expected to stay on course. But they stressed that a more ambitious fiscal goal would help contain rising prices and suggested reducing the projected 2006 budget deficit. Expressing concern that the planned personal income tax cuts would weaken the revenue base from 2008 onward, the Directors called for measures to address medium-term fiscal pressures stemming from population aging and public sector wage increases.

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